Nothing like a takeover battle to entice
various parties to examine the elasticity of accounting interpretations to suit
their purpose. That looks suspiciously like what’s happening at present with
Patrick Corp, Virgin Blue and Toll Holdings.

Chris Corrigan and Paul Little have had to
admit to problems at the mill with their Pacific National rail joint venture.
Corrigan has been playing it hard as part of his Patrick defence. The result is
a sharp dive in what PN will contribute to both parties – but both parties
still have extra reasons to stick to good overall profit promises.

As ABN AMRO’s transport analysts put it in
a note to clients:

Pacific National’s earnings outlook still requires
further investigation. We knew earnings growth at PN was softening but a 48%
decline in 1H06 earnings on pcp combined with unchanged full-year earnings
guidance by both TOL and PRK is difficult to comprehend.

That’s the sort of situation where a degree
of flexibility in accounting can be of assistance. Nothing illegal, of course,
nothing misleading, just various items that might be put off are put off and
more favourable interpretations of other items suddenly become possible.

The story that part of the market and today’s
Smage
has bought is that the Patrick profit shortfall caused by the PN troubles is
being made up somewhere and the likely suspect for that is Virgin Blue. Having jumped 10 cents yesterday on just
such a broker report, VB is up another 8 cents or so this morning at $1.72.

What’s a little bemusing is that the
analyst getting the credit for the lift is Goldman Sachs JBWere’s Paul Ryan –
the recipient 9 months ago of the inaugural (and only) Sunday SunriseChinese Wall Award
for placing a sell signal on VB despite Goldies being an underwriter of the VB
float and advising Virgin Group during Patrick’s takeover bid for VB. That’s
the sort of independence only very, very rarely seen in Australian stock
broking.

Now Ryan has changed his mind and has a buy
on the stock with a valuation of $1.94 and upgrades his earnings per share
forecast by 25% to 40% because of “robust yield environment”. It also
helps to lower oil price assumptions.

It seems to be a bet on Qantas/Jetstar and
Virgin Blue settling down into a cosy duopoly. Certainly the performance of
OzJet so far seems to indicate there’s no other force in the market.

It remains a considerable bet. The oil
price is unpredictable and the unhedged Virgin Blue fuel bill will obviously be
hurting as oil prices are spiking near record territory again. And Jetstar
hasn’t shown any sign of taking the pressure off in its battle at the bottom of
the market.

Still, accounting can do wonderful things
when it has to. Patrick was able to suddenly extract a fat dividend from VB
when it needed one, so a better-than-expected profit shouldn’t be much harder.

On the other hand, forecasts can be wrong,
if not plain laughable. Anyone remember Grant Samuel’s Virgin Blue valuation of
between $2.43 and $2.90 a share when Patrick was easily winning control with a
takeover offer of $1.90? And how about the $2.25 float price? Wonder if Goldies
had a hand in setting that.